'How much should I charge so that I earn an equivalent to my old salary?'
'How much does my hourly rate need to be to cover costs?'
'How do I assess how valuable my work is to clients?'
Don't sell yourself short!
Calculating freelance prices is tricky. And it’s especially hard when you’re just starting out and don’t know all the costs of running a small business.
In this article, we’ll guide you through how to set your freelance rates – what mistakes to watch out for, and what to keep in mind when pricing your work.
- 3 classic pricing mistakes
- How to calculate freelance rates
- Value-based pricing model
3 mistakes to avoid when calculating prices
Pricing is all-important. Not only does pricing affect how customers perceive your business and whether they buy from you, it’s literally what keeps your business afloat.
Pricing determines revenue, and revenue shapes business success: if too little money comes in, the company won’t make it. As a freelancer, getting the prices as close to perfect from the start is a priority – but there’s always room to learn and grow.
So without further delay, here are three classic mistakes freelancers make when setting their prices.
1. Don’t guess your prices
Lots of freelancers starting out choose prices without enough consideration. Yes, it feels easy: you estimate the approximate number of hours you work, add a little extra to be safe, and invoice your client that amount – done and dusted! If you’re selling a physical product, maybe you just set a price based on what feels right.
‘€3 for a bamboo toothbrush seems about right. I’d pay that.’
But… even a generous guess is not good enough! You can do better.
First, there’s a risk you undervalue your work by not accounting for all possible side costs. Second, if the price is wrong – either too high or too low – you lose out on potential customers.
2. Don’t copy competitor prices
‘I’ll just check what my competitors are charging and set my prices to match theirs. Case closed.’
Seems like an easy solution, right? Think again. This can pose problems too.
Mapping competition and market prices definitely makes sense. Competitor prices provide a good benchmark (i.e., point of comparison), and sussing out the competition in your field helps you decide whether your prices are in the right ballpark.
But prices should never be copied directly. Coming from outside a business, you can never know exactly what considerations your competitors are factoring into their pricing – for example, staff, supply, location, their own financial situation.
Not only this, but if your prices are exactly the same as your competitors’, you also won’t stand out. And no, differentiation does not mean cheap prices. If your product or service is better, your price should reflect that.
Remember, most businesses want to attract high-value customers who’ll keep coming back and become advocates of their brand. That said, it can take time to find your sweet spot.
3. Don’t set prices too low
Selling themselves short is the most common mistake freelancers make when setting prices. It could happen for any number of reasons, such as:
- Lack of confidence about their own skills
- Minimal experience running a business
- Fear of losing customers to high prices
- Previous hourly wage as an employee
- Calculating for time/deliverable, not for value
If you don’t reel in enough revenue, you’ll have a hard time sustaining and growing your business. It sounds obvious, but…
The cheaper you sell, the more you have to sell!
Your time is limited. If you set prices too low, you can’t simply increase your income by doing endless hours of work. And why would you want to?
As a new freelancer, you can’t be an expert in everything – but each job you do increases your experience, confidence and understanding of the value you bring to the table.
Be confident, and let your prices reflect your worth.
How to calculate freelance rates – what costs to factor in
Lots of freelancers or small business owners are people who have made the leap from employee to self-employment life. If this is you, you might be tempted to bill your work by calculating an hourly wage based on how much you’d earn in salary.
But you’re in a different world now, and the rules have changed. To help you avoid this common mistake, here’s a simple calculation to show how quickly this pricing model goes wrong.
Factor in expense costs
Say you’re aiming for a monthly salary of €3,000 pre-tax. You calculate that there are on average 21 working days per month and 7.5 hours per day. So you have 157.5 working hours a month. Now you just divide your monthly salary by working hours:
3,000 / 157.5 = €19.05
Around €19 sounds like a decent hourly wage, right? (At least to start.)
However, an important element is missing from this calculation: the side costs associated with running a business. As an entrepreneur, there are many costs and fees that you’ll have to personally take care of, including:
- Taxes and pension
- Business account
- Accounting and legal
- Travel expenses
- Rent and utilities
- Website and marketing
- Software subscriptions
- Hardware equipment
- Professional memberships
Factor in billable hours
Calculating the hourly rate isn’t just about taking side costs into account. You also need to think about how much time you spend on actual work.
What about that trip to Majorca?
And that time you were laid up in bed for a week with a severe case of the sniffles. Our calculation above doesn’t take into account holiday, sick days or professional development days. It turns out 21 working days each month is not a realistic goal. Unless you never want to take a day off.
Plus, as an entrepreneur, you take care of everything yourself. So you don’t in fact have 7.5 each day to spend on productive work. Some time goes to marketing, answering emails and admin.
By saving time on managing company finances, you have more time for the work you get paid for.
Factor in taxes and fees
Of course, you also pay tax on the work you do. As a freelancer, your revenue is often your own personal taxable income – i.e., you pay income tax on it (depending on your business type). In most countries, you’ll also pay VAT and other taxes.
Once you subtract expenses, taxes, insurance and pension contributions from your €19 hourly wage, and take into account that there are fewer than 21 working days, you’re left with a pretty small income.
This is no good, for obvious reasons.
How much do freelancers actually pocket?
As a rule of thumb, you might say that the amount billed should be roughly double the amount left in hand. In some industries, you might even triple it.
But up until now we’ve only looked at two pricing models for freelancers: time-based pricing and project-based pricing (the two are naturally related). Another approach to pricing is looking at the value you bring to your customers.
A Finnish price-setting story
What does all this look like in practice? Freelance journalist Anna Kauhala made her own calculations. See how one Finnish freelancer set her prices in real life. (Story in Finnish)
Value-based pricing – how experts calculate prices
Value-based pricing means you set prices based on how customers perceive the value of your product or service.
Instead of asking how much time a job takes you to do, ask yourself how much your customer believes it’s worth.
This is best suited to freelancers who offer unique or highly valuable products or services. For example, it might take an experienced graphic designer just a few days to design a logo, but if this logo is for a multinational corporation that plans to use it on every product and branded item for years to come, the designer could charge a small fortune.
Ask yourself this: are your clients interested in how many hours a job takes you to complete, or how it solves their problem?
Value-based pricing is a way of being recognised as being more than your billable hours. Instead, you’re seen as a person who adds value to other businesses. It also lets you ask for bolder prices, meaning you can earn more than minimum wage.